The imminent launch of Netflix’s new ad tier has the potential to be a streaming game changer—both for Netflix’s users and its bottom line.
After losing nearly 1.2 million subscribers in the first two quarters of 2022, Netflix said in its third-quarter earnings report on Tuesday that it added 2.4 million subscribers, higher than the 1 million the company had projected last quarter. It also forecast a gain of 4.5 million subscribers for the fourth quarter. This much-needed boost comes as Netflix is gearing up to roll out its new ad-supported, lower-priced subscription tier in early November. The ad-based plan will allow subscribers to cut their Netflix costs by 20-40% in exchange for a few more interruptions.
With the streaming industry becoming oversaturated with competitors, analysts say Netflix’s push into advertising is a move that could help jumpstart the streamer’s growth by enticing budget-conscious consumers to sign up for the service.
“It might hurt their revenue,” says Laura Martin, senior entertainment and internet analyst at Needham & Company. “But it should help their subscriber growth.”
Netflix said on Tuesday that the ad tier’s launch is expected to result in “meaningful incremental revenue” over time. It will also make Netflix more affordable than ever for users—provided they don’t mind watching some commercials.
What Netflix ads mean for users
Netflix’s ad-supported tier, Basic with Ads, will launch in Canada and Mexico on Nov. 1, followed by Australia, Brazil, France, Germany, Italy, Japan, Korea, the U.K., and the U.S. on Nov. 3, and Spain on Nov. 10.
With Netflix’s current monthly subscription model, subscribers in the U.S. can use their account on one, two, or four screens at once and prices reflect the number of screens available—ranging between $9.99 and $19.99. The cheaper, ad-supported plan will cost $6.99 a month and allow subscribers to use their account on one screen at a time. Netflix has said there will be an average of five minutes of ads per hour that will play before and during films and series.
There are also a few catches. Like its ad-free Basic plan, Basic with Ads will have a lower video quality than Netflix’s Standard and Premium plans. Additionally, Basic with Ads subscribers won’t be able to download shows and movies to their devices for offline viewing, and won’t have access to about 5% to 10% of Netflix’s content catalog because the company doesn’t have the rights to show those programs with commercials. Those who sign up for the ad tier will also need to provide their date of birth and gender, as Netflix eventually plans to use that demographic data to target ads.
At $6.99 per month, Netflix’s ad plan will be less expensive than those of several of its competitors. Disney+ and Hulu’s ad plans will both be $7.99 per month when Disney+’s ad tier launches in December, while HBO Max with ads is $9.99 per month.
What Netflix ads mean for Netflix
Recent Accenture research showed that 63% of consumers agree that it’s too expensive to pay for all the entertainment subscriptions they want. But with its ad tier, Netflix is dangling a shiny new option in front of more frugal consumers, says Wedbush Securities media analyst Michael Pachter.
“A middle or low-income household that’s a streaming subscriber might not be able to afford five different subscriptions,” he says. “But there will be those people who say, ‘I don’t really want to pay [the Netflix Standard plan price of] $15.49. I don’t want to pay $186 a year. But $6.99 per month is $84 a year. Maybe I’ll stay for $84 with a few ads.’”
By introducing a less expensive ad tier, Netflix is running the risk of existing subscribers trading down to pay less each month. It’s banking on ad revenue offsetting that loss, says Seth Shafer, a senior research analyst for media research group Kagan.
“Netflix is balancing new ad revenue coming in with the potential of subscription revenue being lost from existing users downgrading,” he says. “But it’s going to take some time for the advertising business to fully monetize.”
On Tuesday, Netflix said in its letter to shareholders that its ad business is still in “very early days” and building up its membership base and associated ad revenue will be a process.
The most significant challenge facing Netflix’s new ad business is how dependent advertising is on what’s happening in the broader economy, Shafer says. “When you look at the economics of it, there’s this big question of are we heading into a recession?” he says. “In that context, things start to look a little bit dicey.”
But Netflix is also a bit of a different beast than other streamers, Shaffer says. “For years, advertisers were clamoring for the ability to buy ads on Netflix,” he says. “So even if economic headwinds continue to grow, Netflix’s results may be different from the broader advertising market’s.”
